The government today announced a radical package of measures allowing local authorities to offer council homes on short-term lets rather than for life, stopping children inheriting new tenancies, and giving authorities the powers to shuffle the homeless to areas outside borough limits in a bid to stop council housing becoming a "poverty trap".

Charities condemned the proposals for "feeling like a deliberate attack" on the poorest in society, but ministers defended their plans, saying that "the allocation of a social home [at present] leads not to independence and self-sufficiency, but appears instead to reduce incentives to work".

Grant Shapps, the housing minister, has pinned the blame for the breakdown in the system on the previous administration, claiming that Labour had fundamentally failed those most in need and citing housing waiting lists of 5 million people.

Council houses for life were introduced under Margaret Thatcher 30 years ago and tenants were allowed to pass the property on to their children. The government says this is no longer an option: "In some instances those tenancies can be inherited by family members who may be in no need of housing."

One of the biggest changes is that councils will decide who can apply for homes. At present this is the preserve of central government – and a cornerstone of Labour's 2002 housing reforms.

However, this will end under the new proposals, and local authorities will be able to arrange waiting lists on the basis of need or how long someone has lived in a borough, or even exclude those who have struggled to keep up with rental payments in the past.

The thorny issue of how to handle immigrants' housing needs will be retained by Whitehall.

The new proposals will see a new "local authority flexible tenancy" with a minimum fixed term of two years for new tenants, although councils "would be free to set a fixed term of 10 years, 20 years or longer".

A key feature is that a household's changing circumstances should be periodically assessed to see if the housing requirement should change – with housing associations having to evict people if they refuse to go.

David Orr, the chief executive of the National Housing Federation, said: "It's difficult to imagine a more powerful disincentive to do well than the threat of losing your home if you start earning too much.

"We must ensure that this does not happen. People need the stability and security of a safe home."

The coalition said it believed that some people presented themselves as homeless in order to get a council house. "Twenty-one per cent of social lets to new tenants are allocated to people owed the main homelessness duty, many of whom will have been provided with expensive temporary accommodation while waiting in the housing queue.

"In many cases, homelessness may be the result of a temporary crisis caused by, for example, relationship breakdown or being asked to leave accommodation by family or friends."

The government argues that the only way to end this is to force applicants to take private accommodation – even if it lies in another part of the country.

The "right-to-buy" rules will be extended so that social housing tenants – those in housing association homes as well as those in council houses – can buy their homes after five years of renting them. In return, local associations will be forced to plough back the money they receive into providing new homes.

There will also be a new affordable rental system through which housing associations will offer new tenants a rent higher than current social housing rents, at a maximum of 80% of local market rents. That money again will be ringfenced to provide for new homes.

Campbell Robb, the chief executive of Shelter, said: "The government's response to our affordable housing crisis, both through these policies and those we have already heard on cuts to housing benefit, social housing investment and legal aid, has seen the poorest and most vulnerable in society penalised again and again in what begins to feel like a deliberate attack.

"From Shelter's 40 years of experience in dealing with those in housing need we know that very few people go from homeless to self-sufficient within two years. The proposal for a minimum of this period shows the government's naivety in how quickly people are able to get back on their feet, and we urge them to reconsider this in favour of at least a five-year minimum."